In This Issue:
The Outlook Is Better For An Improving Economy
Profit Growth Can Be Misleading
Big Companies Still Have An Advantage
Emerging Countries Are Making A Strong Recovery
Two Long Term Dividend Payers Look Good
Fasten Your Seat Belts, Oil Prices Are Roaring Back
The Bottom Line This Week
been a bear market for bears recently as their many doom-and-gloom
pronouncements have gone wanting. The old bull just won't quit, despite all the
logical arguments that predict his demise. It's a good lesson that paying
attention to what is actually happening in the stock market is more profitable
than following theories. Mother Market always has the last word.
numbers tell the story. Since our last letter on July 29, the Dow and the
Nasdaq have gone up 5.2% and 2.9% respectively. In only one of the four weeks
did the market slide into negative territory, and then by less than 1%. By
contrast, the best week registered a 7.3% gain. That's the sort of tailwind we
like to have.
The Outlook Is
Better For An Improving Economy
course, the rally could come to grief overnight. Stocks are rising on the
expectation that the economy is finally coming out of recession, and companies
will again make oodles of money. The unofficial office pool index suggests that
most people on Wall Street think growth rates will be higher than Grandpa
Bernanke at the Fed is predicting.
accomplished tea leaf reader we talked to said his off-the-record prediction is
that growth may exceed 4% next year. That would be quite a jump from two points
behind the zero line, which is where the economy is today.
Can Be Misleading
if the economy doesn't win the long jump next year, most well-run companies
should continue to see their profits increase. That's because nearly all of
them have been on lean-and-mean programs that have cut costs to the bone. So
even though revenues have been abysmal, profits have been on an upswing.
course, lean-and-mean can only go so far. At some point, all the useful cuts
will have been made and profits must come from actually selling more goods.
That change will mark the real beginning of a recovery.
Still Have An Advantage
big blue chips have a king-sized advantage when it comes to selling more
products, even if the optimists are wrong and the U.S. economy just dribbles
along. The global economy, where most mega companies do most of their business,
is still doing well – and it should do even better next year. If so, the
multinationals will once again prove that big is the size to be in the 21st
stronger global economy will also help many U.S. firms that don't have
facilities overseas. Many exporters are beginning to see their order books fill
up as foreign firms ramp up their operations to meet their expected needs. As a
significant side benefit, rising exports will help the U.S. trade balance,
which has been suffering mightily for several years.
Countries Are Making A Strong Recovery
of the global economy, nobody is doing better than the emerging market
countries. You may remember them from a few years ago when they were also on a
roll. However, the high achievers plunged when their main customer, the U.S.,
slipped into the red.
many developing countries are growing quickly again. This time around, the
countries are tapping into their own regional markets rather than putting all
their efforts into winning U.S. orders. Fortunately for the local suppliers,
the approximately 2.5 billion people in developing countries want just as many
plastic salad shooters and cars as their American counterparts.
best of all are the BRIC countries (Brazil, Russia, India, and China). The
first two are in the catbird's seat for growth because they are major suppliers
of energy and raw materials to industrial countries of all sizes.
an investor's standpoint, emerging markets still look good for long-term
portfolios because they are many years away from reaching their peaks.
To that end, we once again
recommend the iShares MSCI Emerging
Markets Index ETF (EEM) http://finance.yahoo.com/q/bc?s=EEM.
When we first presented the fund on June 26 it was $32.32. The price is now
$36.47, a 12.8% gain. We think more is on the way, but we can expect some bumps
along the road. Emerging markets will always be volatile, which is why we think
the best way to invest is with a diversified fund.
Two Long Term Dividend
Payers Look Good
Closer to home, we continue
to recommend stocks that pay rising dividends. Although fears about inflation
are continuing to make the rounds, deflationary forces are still at work in our
economy. As long as that situation continues –which we think will be
longer than most people think— the buying power of dividends will
If you purchased a selection
of the blue chip companies we have been recommending in recent months, you
probably don't need to make additions to your dividend portfolio. But if you
want to gild the lily, we think you should add Sysco Corp. (SSY) to the group. http://finance.yahoo.com/q/bc?s=SYY
Sysco is the leading supplier of food to colleges, hospitals,
corporate cafeterias, hotels, and restaurants in the U.S. The company has
been winning many orders because it can operate more efficiently than its
customers can do on their own. At the same time, Sysco can usually provide a
better and more diverse menu.
We think Sysco has excellent prospects for several years of
growth. The company has been strengthening its business capabilities by
purchasing other food suppliers in its field. As a result, Sysco will be coming
out of the recession much better equipped to generate new business than any of
Sysco also shines in the dividend department. The company
currently boasts a 3.8% yield which should increase by 10% annually for the
next few years. The stock price is also likely to do well.
Another stock with an attractive yield is Abbott Laboratories (ABT) a 121 year old company that produces and
sells healthcare products throughout the world. http://finance.yahoo.com/q/bc?s=ABT
Abbott, of course, is best known for its many successful
pharmaceuticals. But the company also offers a variety of diagnostic products
that are in widespread use. In addition, Abbott produces infant formula and
adult nutritional drinks – and it supplies stents, vessel closure
devices, and related products for coronary applications.
One of the reasons we think that Abbott is attractive is the stock
is down due to all the worries about a national health care program. If such a
plan is passed, there is a possibility that drug prices will be forced down.
However, we think the large increase in the number of people who will receive
care will more than make up for the shortfall.
Abbott's yield currently stands at 3.5%. As with Sysco, Abbott
Labs will probably continue to increase its annual payout, as it has been doing
for 37 straight years. Nearer term, the stock should make an attractive
catch-up move once the outlook for national health care clarifies.
Your Seat Belts, Oil Prices Are Roaring Back
Although it has not yet caused gasoline prices to shoot up, the
price of oil has more than doubled since its low point earlier this year. In
fact, at about $75 a barrel, oil is about half way back to its all-time high of
$149 that it set during the late, great economic boom.
The main reason oil prices have been rising strongly is China and
other developing countries have been buying all they can find. The countries
are stockpiling as much as possible because they think that supplies will
become tight again as the global economy improves. We think they are right.
China is not just buying oil, it is also buying producers. The
country has become Brazil's biggest customer, and is rumored to be in
negotiations to purchase the largest oil company in Venezuela.
In Africa, where there are few local oil companies with which to
do business, China's approach is to extract the oil itself by setting up its
own operations. Local governments and warlords are happy to give China a free
hand to do whatever it wants in exchange for their piece of the action.
The price of oil is like the proverbial tide that lifts all boats.
When it goes up so do the profits for companies that sell it. Since ExxonMobil (XOM) has a delightfully large amount of the stuff,
we think it is the company to buy. http://finance.yahoo.com/q/bc?s=XOM
Line This Week
the Energizer bunny, the stock rally just keeps going. The downside with both
the bunny and the rally is, when the end comes it will be sudden. Therefore, we
think this would be a good time to take some profits off the table, and to put
stop loss orders on everything else.
new companies that look very good to us are Sysco Corporation and Abbott
Laboratories. Because they are in defensive sectors, the stocks should not
be as sensitive to a market correction as their more aggressive cousins. We
also like the dividends the two companies pay, and the prospects for more.
oil prices on a tear again, this appears to be a good time to buy more ExxonMobil, a stock we recommended on
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08-27-2009 2:06 PM
Research & Editorial Staff